Normally, a robust economy that creates employment opportunities bodes well for the housing market. However, this is not the case in the United States.
According to Freddie Mac’s Chief Economist, Sam Khater, “Right now, the US, with its strong economy where companies are looking to hire people, tends to create challenges for the housing market. Now the question is, Why?
Inflation
When many of the citizens of America have jobs, it means that many people are making money that will be spent in the economy. So long as there is a lot of money in circulation, the price of goods and services in the economy will be threatened to increase.
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Right now, the American economy is struggling with inflation. The steady increase in the price of goods and services in the country at one point soared to a 40-year high.
A Solution to the Inflation
In a bid to tackle the inflation, the country’s Federal Reserve responded by hiking rates at their most aggressive clip since the 1980s, beginning in March 2022, to their present range of 5.25 to 5.5 percent.
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This year, in January, policymakers kept the rates at that level for the fourth meeting in a row. And they signaled that their hiking cycle was done as inflation cooled down.
The Result
Prices of goods and services increased by 3.1 percent last month. Although this increase is slower than the acceleration recorded in December, it is not quite to the target. The central bank has a 2 percent target.
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On Thursday, the Labor Department disclosed that jobless claims were reduced. This means that those looking for jobs can find one. Although this is good economic news, it also means inflation could take longer to reach the central bank target as citizens keep spending money.
Pressure on Mortgage Rates
According to Sam Khater, the strong incoming economic and inflation data has caused the market to re-estimate the path of monetary policy. This has led to higher mortgage rates.
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There are suspicions and fears that the Fed will retain the high borrowing cost much longer. This apprehension about the Fed’s attempt to reduce prices to target has put pressure on mortgage rates.
Mortgage Statistics
The cost of getting a home loan used to be 8 percent for two decades before reducing to a mid-6 percent last October. Now, it has increased to the 7 percent category in recent weeks. This increase is causing a significant reduction in mortgage applications.
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Last Thursday, Freddie Mac, in an interview, said that the 30-year fixed rate mortgage averaged 6.90 percent as of February 22, 2024. This rate increased from last week’s average of 6.77 percent.
Affordability of Houses
“Historically, the combination of a strong economy and modestly higher rates did not meaningfully have an impact on the housing market,” Khater said. “The current cycle is different from what it used to be. Housing affordability is so low that good economic news is the opposite for homebuyers, who are sensitive to even minor shifts in affordability.”
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The increase in rates means that the monthly mortgage payments buyers will have to pay will increase.
Increasing Mortgage Rates
For example, according to Redfin, at the 6.77 percent rate, homeowners will have to pay about $2,640 a month in mortgage payments. This is an almost 8 percent increase from last year’s rate. Meanwhile, higher mortgage rates are repressing supply, especially with used homes. Sellers are not leaving their low-mortgage houses, which in turn is pushing up prices.
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On Thursday, The National Association of Realtors revealed that the sale of used homes increased by 3.1 percent in January. When compared to an annual basis, this rate is close to a 2 percent drop.
A Silver Lining
The average price of a home also went up by more than 5 percent compared to last year’s rate. This has been its strongest gain since October 2022, according to Lead U.S. economist at Oxford Economics Nancy Vanden Houten.
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“We expect the scarce supply of existing homes to keep home price growth positive this year,” she said. However, there is a hopeful prospect.
Future Mortgage Expectations
The only bright side for affordability is that policymakers have said that they are probably going to reduce borrowing costs later in the year. This would help reduce the cost of a home loan.
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Jeffrey Roach, chief economist for LPL Financial, made a statement. He said, “As the Fed prepares for their first rate cut in years, investors should expect mortgage rates to fall by the end of this year. This will provide a catalyst for an improving residential real estate market later this year,”